Laurence Rabinowitz QC, Simon Colton and Mehdi Baiou, instructed by Slaughter and May, have succeeded in establishing the validity and enforceability of nine ‘snowball’ interest rate swaps following a 6 week trial which was the first listed in the new Financial List. At the time of trial, the combined mark-to-market value of the swaps was in excess of €1.3 billion, with total unpaid amounts stated to be in excess of €270 million.
Claims to establish the validity and enforceability of the swaps, and to secure payment of sums due under them, were brought in the Commercial Court by Banco Santander Totta (‘BST’), a Portuguese bank in the Banco Santander group. The defendants were four Portuguese transport companies, which had entered into the swaps between June 2005 and November 2007.
Mr Justice Blair rejected the transport companies’ arguments that they had lacked capacity to conclude the swaps, and arguments that BST had breached the Portuguese Securities Code in selling the swaps to the transport companies. He also decided the transport companies were unable to rely on any rules of Portuguese law to assist their case: all the “relevant elements of the situation”, within the meaning of Article 3(3) of the Convention on the Law Applicable to Contractual Obligations 1980 (the Rome Convention), at the time the parties chose English law and jurisdiction, were not connected to Portugal, and so Portuguese rules concerning gaming and betting, and ‘abnormal changes of circumstances’, had no application.
In reaching his decision on Article 3(3), the judge noted the importance of legal certainty in financial transactions of this sort, and that Article 3(3) should be narrowly interpreted. He concluded that the existence of an international market in swaps, with a range of international banks competing for the transport companies’ business, the deliberate use of international contractual (ISDA standard) terms, an assignment clause permitting BST to assign its obligations to any other subsidiary of Banco Santander (including non-Portuguese subsidiaries) and the conclusion by BST of back-to-back hedging swaps with Banco Santander in Spain were all relevant, non-Portuguese elements of the situation. In identifying the relevance of ISDA terms for these purposes, the judge expressly declined to follow an earlier Commercial Court decision, Dexia Crediop SpA v Comune di Prato. The Judgment is available here.